Types of IPOs Explained: Key Differences Every Investor Should Know

Introduction

The basic concept of an IPO or an Initial Public Offering is to help companies raise capital to support their growth and functioning. These companies are private companies looking to go public by offering their securities for investors to buy. With every bit of equity sold, the company adds to its capital. As the company grows, the investors also get to benefit from it, as their investment grows proportionately with the company’s overall growth. 

In this blog, we will have a look at the different types of IPOs and the differences between them, to help you understand which would be a better fit for your financial goals. 

Types of IPOs

There are two different types of IPOs that companies usually prefer to offer investors

• Fixed Price Issue
• Book Building Issue

Let us have a look at both of these IPOs in detail

Fixed Price Issue

• The price of the issue, when it comes to the fixed-price IPO, is decided by the company and the underwriters.
• They do this by taking the company’s assets, liabilities, and every financial aspect into account. 
• By taking all these aspects into account before deciding on a price for an issue, they can expect to achieve their target funds. 
• The price then decided by both the company and the underwriters is also printed in the order document.
• This document also contains the price justification for the issue by backing it up with both qualitative and quantitative aspects
• The popularity of the issue is known after its closing.
• Fixed price issue IPOs usually see higher oversubscriptions than the book-building issue.

Book Building Issue

• The concept of a book-building IPO issue is new to India and has only usually been practised in developed countries. 
• Here, the price of the IPO is revealed only during the process of the IPO happening
• Book building issues do not have a fixed price but rather a price band, where the lowest price is the ‘floor price’ and the highest is the ‘cap price’
• Like the fixed price issue, the price band for the book building issue is printed in the order document. 
• In such a case, investors can bid for the number of shares they need and the price they want to pay for them.  
• The share price is then decided depending on the bids and is eventually offered either at or above the floor price. 
• The demand for the issue is revealed every day the IPO stays open.

Differences between the Two IPOs

Here’s a look at the main differences between the Fixed Price IPO issue and the Book-Building IPO issue.

Conclusion

IPOs play a huge role in helping newly public companies grow and build better. For investors who choose to invest in an IPO, there are two options; fixed price issues and book-building issues. Where on one hand fixed price issue shares are more in quantity, the capital raised by book-building issues is much more than the former. This is a testament to the growing IPO market, where the book-building issue continues to see a rise in demand, even with its relatively recent introduction.